Nonqualified Stock Options

 

Nonqualified stock options (NQSOs) are also known as nonstatutory stock options. You report NQSO income differently than you report income from these:

When you receive NQSOs, you usually don’t recognize income until you exercise the options. You don’t have total control over the stock. If you don’t exercise your options within the required time period, you’ll lose them.

To learn more, see Publication 525: Taxable and Nontaxable Income at www.irs.gov.

However, the option might have a readily determinable market value. If so, you’ll have to recognize income when you receive the option. Options traded in an open market have market values that are easily determined. (Ex: Traded on the New York Stock Exchange)

When you exercise your options, the difference in these is equal to your W-2 income:

  • Option price
  • Fair market value (FMV) on the date you exercised your options

Your employer will include that amount on your W-2, Box 1. The code “V”will be in Box 12.

The difference between the option price and the FMV when you exercised your option is included in your W-2 income. So, you’ll have already paid taxes on it. The basis of the stock is the FMV of the stock on the date you exercised the options.

You’ll use this equation:

Amount you paid + amount included in your income = FMV

You can often do a paperless transaction in which you exercise your NQSOs and sell the stock at the same time. Even though you perform only one transaction, it’s really two transactions: You exercised your options, and you sold the stock.

Related Topics

Related Resources

Second Home Taxes

Learn more about second home tax deductions and taxes on selling a second home with the tax experts at H&R Block.

Stock Dividends

Are stock dividends taxable? Learn more about stock dividends and get tax answers at H&R Block.

Tax-Free Military Pay

Learn more about the qualification rules for tax-exempt military pay with the experts at H&R Block. Find out if you qualify for tax benefits.

What Are Nominee Dividends?

Learn more about nominee dividends and your options for reporting nominee income with the tax experts at H&R Block.